Good morning and welcome to The J. M. Smucker Company's Fiscal 2020 Second Quarter Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions-and-answers, after the prepared remarks. Please limit yourself to two questions during the Q&A session, and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our fiscal 2020 second quarter earnings conference call. After this brief introduction, Mark Smucker, President and CEO will give an overview of the quarter's results and an update on our strategic priorities. Mark Belgya, Vice Chair and CFO, will then provide detailed analysis of the financial results and our updated fiscal 2020 outlook. A Q&A session will follow the prepared remarks. During today's call, we will make forward-looking statements that reflect the Company's current expectations about future plans and performance. These statements rely on assumptions and estimates and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure concerning forward-looking statements in this morning's press release, which is located on our corporate website at jmsmucker.com. Additionally, please note the Company uses non-GAAP results to evaluate performance internally as detailed in the press release. We have posted a supplementary slide deck summarizing the quarterly results and fiscal 2020 full year outlook. The slide can be accessed on our website and will be archived there along with the replay of this call. If you have additional questions after today's call, please contact me. I will now turn the call over to Mark Smucker.

Thank you, Aaron. Good morning everyone and thank you for joining us. Before we get into our detailed results, I will begin with the changes to our leadership structure that we announced last week. First, after nearly 35 years at Smucker and 15 years as our Chief Financial Officer, Mark Belgya, announced he will retire on September 1st, 2020. Mark will be succeeded by Tucker Marshall, our current Vice President of Finance. The transition will begin on Monday as Tucker will become Senior Vice President and Deputy CFO. He will succeed Mark as CFO on May 1st, 2020, following the completion of our current fiscal year. Mark has agreed to stay on as Vice Chair, until his retirement ensuring a seamless transition. Since joining Smucker seven years ago, Tucker has become an integral part of the Smucker organization. He brings significant financial management experience and a deep understanding of the Company. He has the respect and confidence of his colleagues and the Board, and I am looking forward to partnering with him in the years to come. The second announcement was the evolution of our executive leadership structure. This new structure is designed to improve the execution of our strategy, enhance accountability and streamline decision-making to ensure, we move with speed and agility to deliver on our strategic and financial priorities. The change in structure includes the creation of a Chief Operating Officer role. We have initiated a search for an executive who will provide strategic and operational oversight of our business units as well as our operations and supply chain. We also started the process to identify a new leader of our US sales organization. In addition, we have initiated a search for new pet leaders - for new leadership of our Pet food business, which in the interim…

Thank you, Mark, and good morning everyone. Let me begin with some added color on the quarter. Excluding the US baking divestiture and FX, net sales declined 1% in the second quarter, reflecting lower net pricing on coffee and peanut butter, partially offset by price increases in Pet food and Pet snacks. Volume/mix was flat as declines for dog food primarily, private label in the Natural Balance brand were offset by gains for coffee and Smucker's Uncrustables. Adjusted gross profit decreased $18 million from the prior year or 2%. Our gross margin improved 30 basis points to 38.5%. Excluding the baking business, gross profit was down 1%, primarily reflecting the net impact of lower pricing, not fully offset by lower costs. This was partially offset by favorable volume mix. Adjusted operating income declined $25 million compared to the prior year, a decrease of 6%, a $27 million gain on the sale and $9 million contribution to segment profit from the divested US baking business with the primary difference as the gross profit decline was offset by a reduction in marketing expense. Below operating income, interest expense decreased $5 million, driven by reduction in debt resulting from repayments made over the past 12 months. Other income and expense was $5.9 million more favorable in the quarter due to litigation cost incurred in the second quarter of last year. Finally, the adjusted effective income tax rate was 24.3%, slightly lower than our previous full year guidance range of 24.5% to 25%. The prior year effective tax rate was high at 30%, reflecting the impact of income tax expense associated with the sale of the baking business. This resulted in second quarter adjusted earnings per share of $2.26 compared to $2.17 in the prior year, an increase of 4%. Let me now turn…

[Operator Instructions] Our first question comes from Andrew Lazar of Barclays.

Hi. Mark, I guess just a broader question, just to start us off a little bit, obviously Smucker's has revised the full-year '20 outlook the last two quarters. I'm just trying to get a sense of maybe how you would characterize the new outlook. In other words, do you see this is now providing the Company with sort of the needed flexibility to get the Pet trends on the right track and accelerate the organic momentum, or maybe is there a risk that this is still maybe not enough to fully address some of the route issues aggressively enough and there - therefore could still be a bit of a drag as we think, maybe forward into fiscal '21. I guess particularly in light of some new team members coming on board that would presumably also want and expect to have some input and such, starting. Thank you.

Thanks Andrew. Well, first of all, let me just start by saying, delivering on guidance is a foundational priority that I have as CEO and it's extremely important. So given the fact that we have missed guidance a couple of times this year, we - this round we took a very hard look with a very critical eye and really made sure that as we look forward, we were judging both the opportunities and risks that - really exists in the business and that we are giving ourselves the appropriate flexibility as you put it. So we do believe that the top line guidance is prudent and does reflect adequately both opportunities and risks. And so, while there are some challenges to sales growth and isolated really to premium pet, that's more or less what drove our revision. We still look at - the majority of our business is actually still performing at expected levels or above.

And that was helpful. Thank you. And then, I know that...

Andrew, if I can just maybe add on to Mark's comments and dollarize a little bit what I had in my prepared comments. So for the benefit of everyone on the call. If you look at, basically the change in our top line guidance, so for everyone you'll recall it was zero and negative one before. So if you take the midpoint of that and just call it down 0.5% and basically try to explain the 250 basis points to get to our new minus 3. There's really three components that I - and I called out. First of all, about 50 basis points of that was due to this quarter where we fell short of expectations, okay. The second component I would suggest is about 75 basis points of this de-risking in both in as it relates to the competitive activity and some of the things that Mark just outlined, is related to Pet, but also we had really strong comps as you'll recall in Q4 in peanut butter and coffee. So that's sort of half of it, if you will. And then the other half would be 125 basis points to get us there would be primarily in the premium Pet. So that's how we go about. Based on that, we've got a fair amount of - I'll use a loose term here, cushion, on that 75 basis points of derisking. And then if you just translate that to the earnings side, that de-risk portion probably accounts somewhere between $0.10 and $0.15. So just to explain how we get to that 8 to 10 number at the low end of the guidance, that is taken into account the - sort of the de-risk portion of that sales number.

Our next question comes from Ken Goldman of JPMorgan. Please state your question.

Thank you and congratulations to both Tucker and Mark Belgya, Mark, thank you for all your help over the years.

Thanks Ken.

I wanted to start off by saying or asking really, you are making a change in leadership in Pet, but at the same time, at least when I hear you, the finger is being pointed mostly at competition, some channel shifts things that maybe are described best as exogenous. So I'm just curious to get a better sense of what you think internally, Smucker may have done as a Company a little bit or maybe should have done a little bit differently, and maybe what some of the changes should be made going forward that you can control within the Pet side.

Ken, this is Mark Smucker. I'll start. So I guess what I would say first of all is I would go back to the prior quarter, where we acknowledge that we did not adequately anticipate the level of competitive pressure that we would experience from new entrants, not just one entrant, but, there are multiple brands in the competitive space, nor did we react fast enough. So I would really point the finger at just the fact that there were a multiple competitive dynamics that were going on, that we should have reacted faster to. In terms of the broader leadership, challenges or changes rather, obviously Mark's transition has been planned for a long time, and we took a very thoughtful approach to the holistic leadership structure. And so this was not a knee-jerk reaction, these were changes that we had that through thoroughly and had decided to sync up some of the broader leadership changes along with the CFO announcement. And then ultimately, at the end of the day, I just go back to my prepared comments that the intent of the structure outside of any individual change is really intended again to increase agility, make sure that we have the right level of accountability and the right sets of eyes on the business that are going to really drive strategy.

Okay, thank you for that. And then a quick follow-up, I think you mentioned that the 1850 brand was up in terms of sales, at least in the takeaway data that we see, some of the distribution has maybe shrunk a little bit on that brand. Can you walk us through whether that's an accurate read of what's happening and if it is, maybe what the plan is to sort of reverse that a little bit?

Yes. We still have seen that 1850 continues to perform at expectations. As I mentioned again in the prepared comments, we are launching new advertising, which isn't on air yet. We actually got some nice publicity pre on that, in some of the advertising, the industry rags so that we've had some good feedback there, but ultimately, we continue to remain very focused on 1850 and we do expect to see continued growth in the brand.

Yes, Ken, I just would add also, Away From Home we introduced it there and then also at e-commerce it's showing up well there. So there is some other aspects of growth.

Our next question comes from Bryan Spillane of Bank of America. Please state your question.

So maybe you know, just the first question and I think it kind of follows up on what Andrew was asking. I guess I'm still trying to understand or get a sense for is with new management, new people coming into the organization or plan to have new people come in, how much flexibility is there or potential that the strategy which you laid out for us a year ago would be open to really being materially changed and not just goals, but also just the actual strategy itself? Is there a chance that it would be reset, maybe meaningfully from what you communicated a year ago?

Bryan, this is Mark Smucker. I don't see a meaningful or significant shift in our total strategy. We continue to view that our three growth imperatives are still the right ones. We still believe in the categories in which we play and we still believe in the brands within those. You know what, if there are subtle shifts across our categories, that could be possible. I think, I mentioned in the prepared remarks, Natural Balance and that we may take a broader look at that brand to make sure that we are doing the right things for it. And so we will continue to potentially think about all of our categories and how we refine them, but I think the fundamental priorities against the business remains sound and the existing leadership team is very committed to those as well.

So fair to characterize a lot of what's happened is either execution or needing to make some adaptations to some competitive activity - competitor activity.

That's fair.

And then second one from me, just for Mark Belgya. In the - the protein market is pretty dynamic right now and especially with potentially more product being exported to China, and particularly like within chicken where maybe some parts that were sort of directed towards the Pet food industry could actually be exported. And so what we're trying to get a sense for is your thought on how you're monitoring protein inputs for the Pet food business and is there a potential or a likelihood that you'll start to see some inflation there?

What I would probably say to that is that I would just push back to the comment I had I think it was in my script just around our commodity outlook in general. And we would take those kind of considerations into our expectations, but right now we don't see a significant change in any of our categories as it relates to commodities, including what you just described. Obviously if that were to play out more significant, we, as I'm sure the other competitors in the mix would look at that from a pricing perspective.

Our next question comes from Pamela Kaufman of Morgan Stanley. Please state your question.

Can you elaborate on the competitive dynamics that you're seeing in the premium pet category and the proliferation in premium dog food products that you mentioned in the prepared comments?

There really is no elaboration from what we've previously communicated. I would just characterize it as - this is Mark Smucker by the way - just characterize it as a continued, pretty consistent level of intensity. If I could just, I can give you some specific color on our actions in terms of what we communicated previously. As you know, we have taken very specific actions as it relates to our customer support, both in-store, some of that is pricing as we've discussed previously. Obviously, we actually ramped up our on-air presence for Nutrish. We actually are shooting new advertising for Nutrish in the coming weeks, which won't show up in market probably until sometime in the third quarter and so all of those things remain - we remained very committed to. I think the only change from prior quarter is that the implementation of those has taken a little bit longer, particularly at a customer level, than we would expect. And so, although we have now just as of even this week, starting to reflect at the customer level, it isn't across the entire market. But through this Q3, we would expect to see all of those actions really come to fruition.

And then what was the contribution from innovation in the quarter? Do you still expect a $100 million contribution from products launched this year? And I guess generally how happy are you with the performance of innovation this year.

In general, I would say broadly in an aggregate, we feel that our innovation is actually meeting expectations. There are obviously puts and takes in that. I think our Milk-Bone for example innovation is going well and you think about snacking and I've already spoken to 1850 those are broadly meeting expectations.

Thanks. And then just on the contribution from innovation in the quarter and for the full year?

Yes, we are - hi, this is Mark Belgya, we're really trying to step away from that and I think to Mark's point we're pleased with the performance, but I think as time passes, particularly in that $100 million. We've talked in the past, how that's going to be stretched out over a little bit more time. So we will periodically update that, but that's not something we would look to do each quarter.

Our next question comes from Jason English of Goldman Sachs. Please state your question.

This is Vivek Srivastava speaking for Jason English. My question is on the impact of DCM on grain free Pet food sales, we are witnessing grain-free sales trends worsening in many of the dog food brands, due to building concerns around DCM including Rachael Ray where grain-free sales has declined 7% in track channels since the FDA announcement in June. What risk do you see from this in the months ahead? How have trends been in pet specialty and what steps you're taking to address this? Thank you.

Yes. So if you look across some of the FDA comments that came out, I don't know a couple of months ago, there has been a modest impact to all brands that were named in that. And that does not include, and that includes our brands, but it also includes all of the competitive brands as well. It is difficult, very difficult to quantify what that is. And we continue to make sure that we are offering a wide variety of products to our consumers that they - that they have the ability to choose between grain-free or limited ingredients or what have you. And so we continue to believe a broad portfolio is the right thing to do and we will continue to support those brands and across the entire portfolio.

Our next question comes from Robert Moskow of Credit Suisse. Please state your question.

Hi, thank you for the question. Two actually. Can you just give me a little more color on the Coffee Division sales being flat, Nielsen retail tracking data indicates down 3%. Mark Belgya, I think you mentioned e-commerce being a benefit, but are there other channels that are benefiting this or is there a risk that there is some inventory kind of loading up in the channel, like what happened last year? And then secondly, I think you made a comment Mark about inventory balances being higher at the end of the year. Can you give us a little more clarity on that? Thanks.

Yes. So Rob, this is Mark Belgya. So in terms of coffee, so I did mention the e-commerce was up actually e-commerce I think was in our scripted comments is about 5% of our total company sales and coffee actually saw a nice increase this quarter. So that could be part of what you're seeing. There probably is a little bit of shipment ahead of takeaway, you'll recall last quarter our commentary was coming out of Q4 that coffee had a strong Q4, a softer Q1 and we believe they got all the reasons, the new distribution and some other things. And so we delivered on all of that, particularly in KCups. So that could explain a little bit, what you're seeing as it relates to take away. On the inventory, right now, our balance - our inventory balances are running a little higher. Some of that is where we are with sales. I know the teams are working to work those numbers down now, but as we're looking at our free cash flow, as I said with the take out in earnings and where at least inventory stand right now, though I think the numbers will come down some. We just added a little bit of softness or a little bit of increase in inventory balances and thus a reduction in the cash generation.

And Rob, this is Mark Smucker. I might just elaborate on - give some clarity on stuff that might not come through in the scan data that's positive. So broadly across the coffee portfolio, we were - we had a very good quarter and we were pleased across every brand. And so if you look at growing Dunkin, growing all of our KCups, Bustelo did very well, Dunkin', for example, not only is it the number three, but it is the fastest growing premium brand, and the reason that that's not showing up in the scan data is because Canister - the Dunkin' Canister, which is doing very well falls in the mainstream segment. And so if you take Dunkin' in aggregate, it is growing faster than Starbucks in both - all of the 4-week, 12-week and 52-week periods. And then Folgers specifically, as you know, both in peanut butter and coffee we have - we've experienced significant deflation. But that said, Folgers is playing the role that we want it to, it's - the volume was up in the quarter and so despite the fact that we have that deflation, we've seen both volume growth and we've been able to actually maintain our profitability on the business. So coffee overall is a very nice success story for us in the quarter.

And maybe I could sneak one more in. Marketing as a percent of sales, I think the guidance was to be 6.5% to 7% this year. Do you think you'll be below that because of more just cost to discretionary projects?

No.

No. I would even maybe go one step further Rob is that, because I know that we've been asked and I guess this goes back to one of the earlier questions, it's sort of our strategy, investing in our brands. We would really like to sort of draw a line in the sand now for our - for our marketing dollars. So we will end in that 6.5% to 7% range and - in the events, in the unlikely event that sales were to change from our guidance, we would still look to hold the dollar spend in marketing for the rest of the year.

So judging from the giggles, I think I'll raise my marketing spending in the back half, but I'll - maybe I'll get back to you on that. Mark Belgya, thank you so much for your help over the years. Appreciate it.

Our next question comes from Alexia Howard of Bernstein. Please state your question.

Good morning, everyone, and congratulations to Tucker, and thank you so much to Mark. So the first question that I have is around the free cash flow guidance. It looks as though free cash flow guidance was bought down a little bit more than the sales guidance in the earnings per share guidance. I was just wondering around the mechanics of that or what's causing that revision downwards. And then my second question is really about the visibility into earnings growth from here. Obviously, there has been a couple of guide downs in the past couple of quarters. I guess, I'm wondering, is the visibility deteriorating at this point and what does that mean for the validity of a long-term earnings growth algorithm and also what are the major factors that are now harder to predict than they were previously. Thank you.

Alexia, this is Mark Belgya. So in terms of the free cash flow, I think it - - there's only certain components of that, and I would say it's predominantly the two that I called out on the earnings and on the inventory. There's probably maybe just a little bit more working capital. But as you know, that ultimate number won't be figured out until April 30th when all the balance sheet items are finalized, but there is nothing dramatically in any other areas or components of that calculation that would be off. In terms of just the - your second question, and let me just take a step back and Mark please jump in here. So, in terms of just forecasting generally, I think that with some of the de-risking if you will of our guidance for the rest of the fiscal, we feel that we have taken a prudent approach to consider the competitive activity, particularly in premium pet, have thought through where we had some strong finishes last year. That might be a bit more of a challenge to get through and do feel that we have appropriately recognized that, we would expect earnings growth albeit not as fast as we originally expected beginning of the year, but we would expect that to be in Q4 as I commented on Q3 being down slightly and I don't think there's anything dramatically different in our ability to do so. I think that as we've said in the last quarter, almost two quarters now, you know, our intent is to continue our cost management program, to help alleviate some of the softness that we have incurred and help sort of protect that, that ability to hit the guidance. And, where we stand as of right now, we feel pretty good about our estimate on top line and how that parlays into our earnings guidance.

Yes, I guess, I would just add one comment on forecasting which is, although we are not pleased with the guide down, I would comment that this is a reflection of better visibility into our forecasting and making sure that we're taking the prudent steps in terms of derisking as Mark spoke to earlier. We're making sure that we're reconciling operational and financial forecast in the appropriate manner and providing not only us, the senior leaders, but also the individual businesses with the appropriate level of visibility.

Our next question comes from Laurent Grandet of Guggenheim. Please state your question.

I'd like to focus my first question on the new organization. So, could you please comment on the reason why you're appointed as COO and what would be the exact role of yours in that new power split please? And also, I mean, where are you thinking - where are you are in the process and when do you see, I mean, you can fill this role as well as the new US sales and Pet food leaders? Thank you.

Sure, Laurent. Thank you for the question. So, I did answer this in the prepared remarks, but my focus needs to remain on obviously delivering results and really making the right strategic decisions for the business. The Chief Operating Officer will help in terms of making choices across all of the businesses and will really help to operate the businesses on a day-to-day basis, which I do today, but I also feel that I need to spend a little more time just on strategic matters as well and obviously building the organization for success, obviously for the long term. I feel very good about the team that we have in place today. I think that everybody is very much aligned on the strategic priorities, and I think as COO will quite frankly just help specific decision making and execution at the business level.

And in terms of the process on - in terms of timing for this role, and as well as the two other roles?

Well, we're in a search. We've begun the search for those - for those roles, and those are underway. It's hard to say when we will actually fill them, those things can take time. We are moving as fast as we can. But we want to make sure that we find the right individual that has both the right - the right level of operating experience, but also the appropriate level of leadership experience in terms of developing people and culture. So I won't commit to a timeframe, but suffice it to say we're on it and we're moving as quickly as we can.

One more question it's more on the Pet food. So, in your prepared remarks, you mentioned you lost about $20 million in private label sales. And just during the call, I mean, you also mentioned, it could be about $10 million loss in the third quarter. How should we think more of these private label business going forward? I mean, is it a business that you are planning to move away from and how big is that? Thank you very much.

So generally as a company, philosophically, we only engage in private label businesses where it makes strategic sense or where we know we can generate growth and profitability. And so where we have exited, those were - in most cases, those were conscious decisions to exit parts of the business that were not generating the appropriate return. So we do remain engaged in some of our private label Pet businesses. It is specific to those areas where there is a strategic benefit, partnership with customers and so we will not abandon it, but we will be prudent in terms of how we - how and where we engage strategically on private label.

Our next question comes from Rebecca Scheuneman of Morningstar. Please state your question.

So I'd like to start with the leadership changes as well. And if you could just kind of talk about the process and how you work through that. Did you look at best practices across the industry or was it more of an internal analysis? I just like to kind of hear about the process.

Yes, sure. We did look at best practices across the industry to be sure. We have an ongoing relationship with the search firm that we are using even for the CFO search, I would tell you we did do a thorough search externally and Tucker actually went through a very rigorous process, external evaluation process with a couple outside partners, one being the search firm. And so even in every case, we are taking a prudent approach in terms of how we are looking at filling those roles and just wanting to make sure that we are looking both at best practices, but also making sure that we're taking the appropriate time and necessary steps to put the right talent in each role.

And then my last question is, you had mentioned in the prepared comments about some possible changes you're considering for the Natural Balance strategy, and I was just wondering if you could elaborate about some of the changes you're considering for example, are you looking at possibly entering into food, drug and mass, that would seem to align with your - your be everywhere strategy and I'm just wondering if that's something that you're considering.

Sure. I can't give you much more colors, so I'm not sure you'll be that pleased with the answer, but I do - what I would say is we previously talked about a re-stage. We continue to move forward with the re-stage that includes a whole host of things including packaging alignment, consumer communication, I mean, it really is, it is very broad and it does take time, because it is a relatively deep exercise. I think what we have said previously is that re-stage would be towards the end of the - the very end of the fiscal year. But, beyond that, we will consider a more, a broader strategic review of the brand, that could include things like you're suggesting, but we want to hold off on communicating anything until we really have gone through our own internal process.

Thank you. I will now turn the conference call back to management to conclude.

Thank you all for listening. We appreciate the questions, I guess I would hope that everyone takes away that, they are many areas of our business that are performing very well, because where we focus, we are winning. The softness is isolated to premium dog and obviously we've seen some deflation in a couple of our categories, but hope that you all take away that we have taken very specific and decisive actions, whether it be in the marketplace, financial discipline, investing in our business, the leadership changes that ultimately are really starting to yield results. And so we do have a commitment to you all that we will - we will continue to work and the goal of course is to grow our business in aggregate. And just want to thank our fantastic employees for their commitment to the Company and wish everybody on the call a very happy Thanksgiving. Thank you.

Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.